As expected, the promise of an extended holiday weekend in one of the world’s financial centers (the United States) is having a moderating effect on risk trends – and therefore a negative influence over the US dollar. Without a competitive yield and no hope of its benchmark rates rising in the foreseeable future, the greenback must find a steady deleveraging effort to sustain its advance. That is unfavorable fundamental position when the market is preparing for an activity lull. To begin with, a withdrawal of participation stops trend development in its tracks – it is less likely that the shallow market depth will find enough interest as markets extremes that innately carry a lower probability of return. Furthermore, volume has a distinct connection to risk trends. Beyond a natural correction as traders unwind strong trends (in this case, a ‘risk off’ move) as the liquid void approach, we find that volume peaks when volatility spikes. Given volatility measures are considered ‘fear’ or ‘risk’ gauges, a respite in participation is oftentimes the opportunity for a bounce in speculative positioning.

The important thing to remember, however, after the S&P 500’s biggest rally (2.0 percent) since September 6 and the Dow Jones FXCM Dollar’s (ticker = USDollar) biggest drop in nearly three weeks is that momentum behind a risk appetite move will run into the same wall as the initial trend. In fact, the advance in high yield and more speculative assets is a correction to a prevailing move that is even more likely to stall in these market conditions. The question is whether the sentiment wave dries up before serious technical damage is done. US equity indexes still have some room before they retake the critical support levels that finally gave way two weeks ago. The USDollar, on the other hand, is facing its critical 10,000-figure and 200-day moving average with just Monday’s corrections. Between now and Thursday’s drain, we have a few highlights that can stir risk trends. At the top of the list is the EU’s decision on Greece’s next round of aid (more on that below) and the US Fiscal Cliff.

As traders, it is important for us to focus on the immediate fundamental risks and market conditions to determine our positioning. On the other hand, we shouldn’t ignore the conditions that will affect direction and activity levels after the immediate swell passes. One update that dollar traders shouldn’t overlook this pass session: the IMF’s consideration of inducting the Australian and Canadian dollars as reserve currencies.

Euro Ready to Rally if Greece Given Green Light for Funds, Otherwise…

There was considerable event risk for the euro over the opening 24 hours of trading this week, but the real breakout opportunity comes in the upcoming session. The top headline for the shared currency this past session was news that ratings agency Moody’s had downgraded France from its top Aaa level to Aa1. This carries significant fundamental weight for the Euro-area and its currency. As the second largest Eurozone member, France is a so called ‘core’ economy and market that gives credibility to the region’s rescue efforts of its smaller and more troubled contingents. This news was met with a quick euro drop, but the drive wouldn’t last. First, downgrades in the region are considered more likely and don’t carry as much weight. Second, this is once again a catalyst that falls within a market that is less flammable. But, most importantly, this news comes before a far greater fundamental event: the expected approval of Greece’s next round of rescue funds.

Eurozone Finance Ministers are scheduled to meet at 16:00 GMT to discuss the region’s most problematic country. It is widely expected that the group will finally approve the distribution of long withheld aid to Greece (there is debate between €31.5 and 44 billion) and delivery the funds by December 6. There is still serious contentions here (Greece said it would entertain no more demands), so expect there to be a market reaction.

Japanese Yen Little Moved by BoJ Decision to Hold Stimulus

There has been a lot of talk from both the standing Japanese government and the opposition LDP about increasing stimulus efforts in order to support growth and lower the Japanese yen. Where the latter group (on track to take back the government) is threatening to force the BoJ’s to leverage its stimulus efforts, the policy authority announced this morning no change to their programs. Alternatively, the Chief Cabinet Secretary said the government is considering a second stimulus program of 1 trillion yen (~$12.3 Bln). For contrast, the Fed does $85 per month…

British Pound: BoE’s Miles – We Can Offer More Stimulus

The pound rose for a third day against its US counterpart Monday. That progress has more than a little to do with the weakness of the dollar. When we look at other sterling crosses, the individual currency’s performance is considerably diminished. The pound is ‘drifting’ – playing the counterpart of more influential currencies. Of note this past session, BoE member Miles said more stimulus was possible – an flimsy threat.

Australian and Canadian Dollar – Ultimate Safe Havens?

There is an indelible connection between a currency’s liquidity and its position as a reserve. With the title comes the assumption that funds are particularly safe within that country’s financial assets and therefore currency. Currently there are five major, recognized reserves: dollar, euro, yen, pound and franc. However, that list may expand after the IMF said it was considering adding the Australian and Canadian dollars…

Swiss Franc: SNB Official Wants More Company Amongst Safe Havens

SNB vice-chairman Danthine made a remark Monday that he hoped other currencies could join the Swiss franc as a safe haven. Why? Because, the options available to traders (the dollar is dealing with the fiscal cliff and yen is close behind) for diversification are shrinking as existential crisis fears for the Eurozone are building. If European’s seeking safety see no alternative other than Switzerland, it spells constant pressure.

Gold Advances Despite Tame Greece, Fiscal Cliff Fears

Two of the top financial risks for the global market were put on ice recently. The Fiscal Cliff has surprisingly fallen from the headlines shortly after House Speak Boehner mentioned productive conversation on Friday and Greece is expecting to finally receive its funds on Tuesday. Under normal circumstances, we would expect gold to drop on this shift. However, with the dollar dropping, the metal follows different lines

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

3:14

JPY

Bank of Japan Rate Decision (NOV 20)

0.1%

Policy expected stable, but political developments watched as elections called for Dec 16

4:30

JPY

All Industry Activity Index (MoM) (SEP)

-0.5%

0.1%

Decline continues on weak demand

7:00

JPY

Convenience Store Sales (YoY) (OCT)

-1.6%

Consumer spending still weak

7:00

CHF

Trade Balance (Swiss francs) (OCT)

2.01B

Swiss trade pick-up seen to be result of more confidence European economy

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